Owner financing is on the rise as banks fail and real estate markets tumble. When a seller accepts payments over time a hopeful buyer can purchase a home even when the bank says, “No!”
But are you left wondering “who does what” when it comes to owner financing? Here is a straight forward explanation of the 5 main players when property is sold using the seller carry back installment sale.
#1 – Seller – Note Holder – Payee
The seller owns the property being sold. If they finance a portion of the sales price for the purchaser through owner financing they become the note holder or payee.
The payee is receiving payments on a note or contract. If the payee assigns or sells their rights to future payments to a note investor they also become a note seller.
When it comes to the legal documents the payee is identified as the:
- “Grantor” on the Warranty Deed
- “Beneficiary” on a Deed of Trust
- “Mortgagee” on a Mortgage; and
- “Vendor” on a Land Contract.
#2 – Purchaser – Property Buyer – Payer
The purchaser buys the property from the seller. Unless they pay cash, the purchaser will also become the payer.
The payer is making payments. When property is financed with a traditional loan the payments are made to the lender. When the seller finances the property these payments are made to the seller.
Depending on the documents used, the payer is also identified as the:
- “Maker” on a Note,
- “Grantee” on the Warranty Deed
- “Grantor or Trustor” on a Deed of Trust
- “Mortgagor” on a Mortgage; and
- “Vendee” on a Land Contract.
#3 – Note Buyer – Funding Source – Investor
When sellers prefer cash now instead of payments over time they can sell their rights to a note buyer or note investor. This funding source can be a financial institution, retirement account, private company, or an individual.
Once the investor closes and receives an assignment from the note holder the payer will receive notification to make future payments to the investor instead of the seller.
#4 – Note Broker – Cash Flow Consultant – Note Finder – Referral
When sellers want to liquidate a note for cash they will often turn to a note broker. Also known as cash flow consultants or note finders, they act as a financial matchmaker or middleman between the note seller and the note investor.
The investor customarily pays the fees earned by note brokers once a note purchase is completed. This might be a set dollar amount, a percentage, or a deduction from the price quoted by the investor, depending on the referral relationship with the investor.
#5- Real Estate Professionals
There are also a number of support professionals that can be involved with the purchase of real estate. These include real estate agents, title companies, appraisers, property inspectors, real estate attorneys, and tax accountants. Their role in an owner financed transaction would be similar to the more traditional sale using bank financing.